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Valuation Workbook: Step-by-Step Exercises and Tests to Help You Master Valuation, 5th Edition by McKinsey & Company

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21

Mergers and Acquisitions

Acquisitions rarely create value unless they do one or more of the following: (1) improve performance of the target company, (2) remove excess capacity, (3) create market access for the acquirer's or target's products, (4) acquire skills or technologies at a lower cost and/or more quickly than could be done without the acquisition, and (5) pick winners early. Most of the value of an acquisition goes to the target's shareholders unless one or more of the following hold for the acquirer: (1) it had strong performance before the acquisition, (2) it can pay a low premium, and (3) it had fewer competitors in the bidding process. The value created for the acquirer is:

Unnumbered Display Equation

Empirical research has shown that acquisitions have come in waves and generally rose when stock prices were high, interest rates were low, and one or more large deals had already taken place. Also, only about a third of the deals created value for the acquirer, a third destroyed value, and the remaining third had unclear results.

Cost savings can create value, but estimating those savings requires a framework. As an example for a generic firm, the analyst might allocate the savings into six categories: R&D, procurement, manufacturing, sales and marketing, distribution, and administration. Assumed cost savings should be estimated and categorized in detail to avoid double counting. It is recommended ...

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